Rep. Walt Minnick (left) floated the new plan that has stirred concern in the Democratic Caucus as well as among moderates on Rep. Barney Frank's Financial Services Committee. | Composite image by POLITICO

Moderate Dems may buck Obama plan

Blue Dogs and other conservative Democrats — uneasy with a key element of President Barack Obama’s plan to regulate Wall Street — are rallying around an alternative proposal that scraps the consumer financial protection agency the president has been pushing.

Rep. Walt Minnick, a freshman Democrat from Idaho, has floated the new plan. Instead of creating a new federal agency to protect consumers from predatory financial firms and shoddy products, Minnick’s plan would have existing state and federal regulators work together in a “consumer financial protection council.”

Story Continued Below

“We’re trying to come up with something that will achieve the objectives of what the White House is asking us to do without creating a new stand-alone federal regulator,” Minnick told POLITICO.

He said his alternative proposal, which is not finished, still meets the goal of creating uniform consumer protections across the spectrum of financial institutions. The council’s authority would cover the “entire landscape” of financial products, including those offered by nonbank institutions, like mortgage lenders, that have gone largely unregulated.

Financial reform has become second only to health care on the Obama administration’s agenda, according to industry lobbyists. And the CFPA remains a main focus for Obama, who highlighted the need for the new agency in a big speech to Wall Street last week and again in his Saturday radio address.

Obama has pushed hard for the regulatory reform and for the creation of a Consumer Financial Protection Agency as a centerpiece of it.

“While many folks took on [larger mortgages] than they knew they could afford, too often folks signed contracts they didn’t fully understand offered by lenders who didn’t always tell the truth,” Obama said. “That’s why we need clear rules, clearly enforced. And that’s what this agency will do.”

But his plan has stirred concern in the Democratic Caucus as well as among moderates on Rep. Barney Frank’s Financial Services Committee. Aides say these more conservative Democrats worry about the scope and effectiveness of the proposed watchdog.

The administration’s proposal has been a regular topic of discussion at meetings of the Blue Dog Coalition for some time, with members skeptical about creating a new bureaucracy as the best way to fix the problem, a senior aide said.

Frank delayed a markup on the CFPA, originally slated for late July, until October, but the extra time has clearly not quelled opposition.

Community bankers, in particular, are fueling the CFPA criticism in Congress, warning that yet another layer of regulation and examination atop an already heavy burden could crush them. They are an important voice in rural districts like those represented by Minnick and some Blue Dogs — districts where small banks keep credit flowing to local businesses when the big banks tighten credit.

“The basic consensus among many of the Blue Dogs and, I’m sure, others is that [with] this new agency and the language that Chairman Frank is proposing, we’re punishing our independent community banks, and they’re really not the ones who got us into this mess,” said one Blue Dog’s chief of staff.

“So we’re looking at some alternatives, and I expect we will be supporting wholeheartedly the Minnick alternative.”

CFPA critics also question the wisdom of separating consumer protection from safety and soundness enforcement, another major objection from the financial industry.